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U.S. Soldiers and Shoppers Hit the Wall

Wars in Afghanistan and Iraq have pushed the U.S. armed forces to the limit. Many soldiers have scarcely seen their families in recent years. But a much larger American army, the one that's spent this century shopping, is even more overextended and its pain is now coming home to roost.

Nobody ever made money exhorting people to save. But U.S. banks and financial institutions have spent huge amounts in recent years telling people debt is good and savings are dumb.

Their ads - to the effect that "good daughters go into debt to take their mothers on vacation," as Elizabeth Warren, a Harvard law professor, put it - paid off handsomely as consumers went on a debt-financed shopping spree. Consumption has driven the U.S. economy; the only problem is consumers ran out of money years ago even as they did not run out of credit cards.

And here we are, with the rainy day our grandparents always droned on about appearing in the form of a deluge, and no savings stashed for it, and President George W. Bush, the debt-spender par excellence, conjuring up a $150-billion stimulus package that evokes the injection of steroids into a prone athlete wrecked by a marathon.

As Stephen Roach, the chairman of Morgan Stanley Asia, said to me: "The very low U.S. savings rate, and related huge balance of payments deficit to attract funds from overseas, are not sustainable things." The adjustment is likely to be long and painful.

Think of it as getting the sacrifice of U.S. soldiers and the obliviousness of U.S. shoppers a little more in sync. The non-relation between expensive wars and exempt non-warriors, a mirage Bush has fostered, has become unsustainable.

Roach estimated U.S. net national savings at a tiny 1.4 percent of national income and household debt at 133 percent of personal disposable income. That last figure means middle class families are tapping into home equity - borrowing against their homes - to buy their kids socks. And if they can't pay the resulting never-sleeping debt, they lose not a room or two, but the house.

Headlines in recent weeks have focused on the international investors - from Japan to Kuwait - riding to the rescue of such American symbols as Citigroup and Merrill Lynch. The Asian financial crisis of the 1990s has gone into reverse.

Photo

Roger Cohen

This turnabout has provided eloquent evidence of the Asian-tilted power shift of the past decade and of the way countries from Korea to Singapore have built up dollar war chests as the United States has plunged into debt.

Beneath the staggering U.S. corporate losses - over $100 billion since the credit crisis began - lie the individuals suckered into taking on debts they won't be able to pay, whatever Bush hands back in tax rebates.

As my colleague Floyd Norris has written of ballooning (and now plunging) property prices: "The only way prices got so high was that people who could not afford to buy those homes were given mortgages they could not hope to repay unless home prices kept rising."

"The median American family is going into what looks like a recession owing more than 100 percent of its income," Warren said. No wonder Citigroup just set aside $4.1 billion to cover possible defaults on home-equity loans, credit cards and auto loans - shoes that have yet to drop.

A weak dollar, outsized personal debt, a massive current account deficit, cash-strapped banks and Asian governments purchasing U.S. Treasury bonds to finance the national debt are not signs of American strength. Nor are they necessarily signs of American decline, because inherent U.S. vitality remains enormous.

But as Benn Steil, an economist at the Council on Foreign Relations, suggested: "We could be seeing a secular shift in confidence in the dollar as a store of value as the impression grows that the United States, to some degree, is losing control of its destiny."

I expect the United States to bounce back, but not quickly. The central fact confronting the next president will be the new limits on U.S. power, both military and economic.

The central challenge will be the provision of needed reforms, primarily universal health care, that begin to alleviate the financial strains on median American families and allow them to get back to saving rather than leveraging assets in a phony consumption boom.

This won't be easy. But then it wasn't easy for Franklin Delano Roosevelt in a far worse situation in 1933.